If You Want More Economic Growth, Cut Tax Rates

Here is an example showing why we should cut our tax rates.

Imagine an island. It has one source of income: guests at its big hotel. They bring in all the money that circulates in the island economy. They rent rooms, eat at restaurants, rent cars, drink, and buy souvenirs.

The money they spend at the hotel and elsewhere goes mostly to employees and business owners. Those folks use it to buy cars and gas, food and clothing, housing, insurance, and eat at restaurants.

The money the guests spend circulates throughout the economy — first through the employees and then through the employees’ spending.

The only way to expand the island’s economy is to bring in more guests, because they provide the only new money.

Island officials want the economy to grow — so government can collect more money in taxes. Citizens want the economy to grow — to provide more jobs, since some people have none.

So the governor urges the hotel to add on. More rooms would mean more guests, and more hotel workers, which would mean more money for the various parts of the economy.

The construction would also bring new money onto the island. That would land in construction workers’ pockets. And then circulate in the economy.

Great idea. But the owner says: No, the possible reward for my risk is too small. I have to borrow money to add more rooms. I have to spend money to promote the hotel to fill the rooms. Then if I do make profits, I have to pay a big tax on them.

If you lower the tax rate on the profits, you will increase the possible reward for me. I’ll weigh the possible reward against the risk. If my reward might be greater, I may go ahead and add more rooms. But to make it greater, you do have to lower the tax rate.

The governor says, “But you’ve got money overseas. You made it on your hotel in another country. Instead of borrowing to add on here, why not use the money you have stashed overseas?”

”Because you will tax it big time when I bring it here,” the owner says. “And then you’ll tax it big time again, when I make a profit on it. That is, if I add on. And if I manage to make profits on the add-on. So if you want me to use my offshore money, you should lower the tax rate on it.”

Some islanders see the wisdom of lowering the tax rates. But others grow envious. The hotel owner is already rich, they say. If we lower tax rates, he will only get richer.

Expand this example by millions. There are millions of businesses in America that would expand — if only taxes were lower. We’re talking big companies and small.

There are countless entrepreneurs who would take the dive off the high board. They would convert their ideas and concepts into startups. Again, if only the possible rewards were a bit higher, and if only tax rates were lower. 

There are hundreds of big companies that hold mountains of cash overseas. They would bring their money back to the U.S. And invest it in expansion. If only our tax rates were lower.

We have a big push in Congress now for lower tax rates — on individuals and on businesses. We also have a push underway to lower tax rates on profits stashed legally overseas.

The problem is we also have a fierce resistance to this. We have people who want to tax companies more. They want to tax big earners more. They say they want to cut taxes only for the middle class and the poor.

That is impossible, because well over 50 percent of Americans pay no income tax. So you can’t cut taxes for them. And many of the poor do better than that. They get money back from the IRS that they never paid in. That added up to about $17 billion last year. Those are tax credits, or handouts.

Our choice is the same as the choice the islanders face in the example. We can tax our businesses — the equivalent of their hotel — more. Or we can tax them at the high current rates — and still expect them to expand vigorously.

Or, we can improve the investment environment for them — by lowering their tax rates.

We can make the pool more enticing. For the entrepreneurs who venture onto the high dive. By lowering tax rates on what profits they may or may not make.

Or we can leave rates where they are, and hope they will still create businesses and jobs galore. But hope is not a strategy.

We are like the islanders in this singular respect: If we want to expand our economy we would be smart to cut our tax rates. We would be smart to stop worrying about some company or somebody making more money.

From Tom…as in Morgan.             

Tom Morgan writes about political, financial, and other subjects from his home near Oneonta. Contact Morgan at tomasinmorgan@yahoo.com. You can also read more of his writings at tomasinmorgan.com